Lindy Edwards

Last week's row over the SPC Ardmona cannery and this week's announcement of the closure of Toyota is lifting the lid on a subterranean ideological debate. It is a debate that shows the divide over how our economy works.

The Abbott government is lining itself up as a purist in the neoclassical economics camp.

In this view of the economy, we have a finite pot of resources and the challenge is to work out how to distribute them to make the houses, cars, food and clothing that maximise human happiness.

The argument goes that the market is the solution. The forces of demand and supply target our resources to produce the things that are valued most and cost least.

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In this view, if your product isn't making a profit, it is not a good use of our collective resources. An industry that is being propped up or subsidised is misusing our resources and being a drain on the rest of us.

Implicit in this approach is a moral judgment that unprofitable enterprises don't deserve to exist. Last week Treasurer Joe Hockey argued that the ''age of entitlement is over, and the age of personal responsibility has begun''. The message was clear: if you can't make it on your own in the market you are not going to bludge off the rest of us.

Hockey's rhetoric risks sounding like a hardline ideology, divorced from reality, to many who run businesses. For the thriving enterprises that have been hit by the high dollar, the misnamed free trade agreements, and the drought, the suggestion that their difficulties are due to a failure in ''personal responsibility'' is going to sting.

The people who run businesses tend to have a view of how the economy works, which for the wonks among us is more commonly theorised by a second camp in heterodox economics. In the heterodox argument, economic growth is a product of the division of labour and specialisation.

In this approach, the story of economic development is that we all started out as subsistence farmers who produced our own food, housing and clothing. We were jack of all trades and master of none and we had very low standards of living.

The first step of development was when people started to specialise as blacksmiths, bakers, tinkers and tailors. This meant people could develop specialised tools and greater skills, making themselves more productive. They then traded their higher value product with others.

Next came industrialisation and the beginning of factories with greater division of labour, higher levels of specialisation and much higher levels of productivity.

Now in the modern international economy we have immensely long production chains. Consider the number of people involved in making your pen. From the geologists that found the ore and the engineers that built the mine to the miners and those who transported the ore, smelted it, turned it into a nib and shipped it around the world. That is not even getting in to the plastics and all the payroll managers, accountants and lawyers required to make those operations work.

There are thousands of people doing very specialised tasks that enable us to get such a sophisticated product for 70 cents.

In this view, the strength of an economy is about its production chains. Competitive advantage doesn't just exist. It is acquired. It takes a long time to build up chains, and to develop the technology and skills.

In this approach, short-term adverse circumstances can wipe out a chain that would have been very efficient if it had the chance to mature. If they are severe enough, short-term fluctuations can also hit well-established chains, wiping out enormous investment and capability.

In the heterodox argument, it is not just demand and supply that dictates which chains evolve. It is also about history, governments and power. One-off fluke events have ripple effects that last for decades. The bigger businesses are, the more important personal relationships with investors and government regulators become.

It is also a view where poverty traps exist. Where chains once broken can stay that way. And where people and under-used resources can fall into cycles of deprivation and decay. People can lose skills, equipment can fall into disrepair and capability is lost.

Hockey and Abbott have drawn the battle lines of this ideological divide sharply. They have opened a very wide battle front, extending the rhetoric about ''lacking personal responsibility'' from the unemployed to struggling businesses. They have picked the fight at a time when the pressures on business are being widely felt across the community.

It is going to be fascinating to watch how it plays out.

Dr Lindy Edwards is a senior lecturer at the University of New South Wales and is the author of The Passion of Politics: The Role of Ideology and Political Theory in Australia, Allen & Unwin, 2013.

64 comments

Abbott hasn't constructed anything in his life. He only knows how to wreck things.

Commenter

Treadly

Date and time

February 13, 2014, 12:47AM

Bravo, treadly. Thanks for your intelligent contribution to the debate...

Commenter

Simon

Location

Melbourne

Date and time

February 13, 2014, 11:04AM

Perhaps first year neoclassical economics is the only class that TA paid attention to in his degree?

Everything after that was a bit hard to understand?

Commenter

pseudomys

Location

Melbourne

Date and time

February 13, 2014, 11:22AM

How many of Abbott's Cabinet (including him) have ever worked in non political work where failure means the sack, not for a few years when they were at uni, but after they graduated?Also both our political parties enjoy superannuation and pensions the rest of the us can only dream about, so they have absolutely no idea how the rest of us live. When was the last time you saw a politician in Centrelink? We really need a new political party led by someone with the vision to capture the public's support, someone to represent the 21st century without the baggage that the others are carrying from the last one. Otherwise we are going to continue to be ruled by parties that have elite incomes, superannuation and pensions, that don't really care about the rest of us, apart from lip service.

Commenter

fredog

Location

Bundaberg

Date and time

February 13, 2014, 11:24AM

All the richest countries in the world are capitalist and many of the poorest are centrally planned. It's irrefutable that markets maximise everyone's standard of living.

I can't believe that Market Deniers keep running the same tired arguments after so many decades of being proven wrong. The science is in - the debate is over.

If you think governments can allocate resources better than markets then move to North Korea to enjoy the workers paradise.

Commenter

Gatsby

Date and time

February 13, 2014, 11:57AM

To really be a 'clever country', our smart workers should not be funded by the taxpayer to be screwing bolts into pre-drilled holes for 10 times the pay of the same 'technicians' in neighboring countries.

By administering a long overdue medicine to bloated, lazy unions and absurdly inefficient manufacturing practices, Abbott is actually ensuring that Australian workers will develop to stand on their own two feet in a fast-changing world.

Bring it on, TA, take the axe to waste.

Commenter

marky

Location

beach

Date and time

February 13, 2014, 12:10PM

@Gatsby

Check out the impressive living standards in Detroit these days. The GFC (an example of markets in full swing - and Govt.'s picking up the mess – is this the Age of Responsibility?) decimated that city's economy. The poor become much poorer. Yes, Capitalism can raise standards, but it can also reduce them. There are winners and losers, and you'll find that the gap between rich and poor is ever growing. Something Adam Smith would be proud of; the Master remains and the Servant (insert Slave) will find it all the harder to climb the ladder. Capitalism requires something (or usually someone) to exploit.

Much of this success in Western nations has more to do with Monarchies that explored and exploited the new world, centuries ago, and raised their standards above and beyond the comparison: reinforcing the heterodox position that chains can be broken for a very, very long time. It also demonstrates the notion of competition and its full effect on those on the losing side. This highlights your suggestion that everyone wins as being somewhat of a fallacy (maybe even fantasy).

Diverse economies that survive macro factors have a variety of markets and mechanisms to ensure success; they are robust. I'd be happy to see 1 tax dollar going to an industry that pays 7 back in tax than save a buck and lose 7 plus more (the trickle effect goes up, as well as down) on the gamble that this may pay off in the future, when the industry transitions toward something else that may be less profitable for both the participants, community and tax payers at large. There's an old saying that sums this up - a bird in the hand is worth two in the bush.

Commenter

OddlyEnough

Location

Not Melbourne

Date and time

February 13, 2014, 1:09PM

@ Gatsby,

Not true. The wealthiest and most equitable countries are the Northern European macro managed economies that highly subsidise their corporations. Sweden, Norway, Denmark and Germany in particular, have intervened in markets for decades to provide a corporate welfarism that has overshadowed the inequitable capitalist laisez faire market economies.

Commenter

Michael J.

Date and time

February 13, 2014, 1:17PM

PS: If the Australian Labor [sic] Party had stayed true to its creed, it would have emulated those examples in Northern Europe, instead of going down the track of free trade policies.

Commenter

Michael J.

Date and time

February 13, 2014, 1:53PM

@ Gatsby - check your facts before making sweeping statements. As well as many prosperous European countries having stroing centralised planning (as raised by another contributor), you can add China and Singapore in Asia as economies that are extensively "planned and co-ordinated".